Notes to Consolidated Financial Statements
1. Description of Business
Clean Diesel Technologies, Inc. ("CDTi" or the "Company") currently commercializes its material technology by manufacturing and distributing light duty vehicle catalysts and heavy
duty diesel emissions control systems and products to major automakers, distributors, integrators and retrofitters.
The
Company is transitioning its business from being a niche manufacturer of emissions control solutions for the automotive and heavy duty diesel markets to becoming an advanced
materials technology provider for these markets. The Company has a proven ability to develop proprietary materials incorporating various base metals that replace costly platinum group metals ("PGMs")
in coatings on vehicle catalytic converters. Recently, the Company has expanded its materials platform to include new synergized-PGM diesel oxidation catalysts (SPGM
TM
DOC), Base-Metal
Activated Rhodium Support (BMARS
TM
), and Spinel technologies, and it is in the process of introducing these new catalyst technologies to OEMs and other vehicle
catalyst manufacturers in a proprietary powder form. The Company believes that this powder-to-coat business model will allow it to achieve greater scale and higher return on its technology investment
than in the past.
The
Company's business is driven by increasingly stringent global emission standards for internal combustion engines, which are major sources of a variety of harmful pollutants. It has
operations in the United States ("U.S."), Canada, the United Kingdom, France, Japan and Sweden as well as an Asian investment.
2. Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. Therefore, the consolidated financial statements contemplate
the realization of assets and liquidation of liabilities in the ordinary course of business. The Company has suffered recurring losses and negative cash flows from operations since inception,
resulting in an accumulated deficit of $199.6 million at December 31, 2015. The Company has funded its operations through asset sales, credit facilities and other borrowings and equity
sales.
At
December 31, 2015, the Company had $3.0 million in cash, and based upon the Company's current and anticipated usage of cash resources, the Company will require
additional financing in the form of funding from outside sources during the early second quarter of 2016. The Company will evaluate the amount of cash needed, and the manner in which such cash will be
raised, on an ongoing basis. The Company's continuation as a going concern is dependent upon its ability to obtain adequate additional financing, which the Company has successfully secured since
inception, including financing from equity
sales and asset divestitures. However, there is no assurance that the Company will be able to achieve projected levels of revenue and maintain access to sufficient working capital, and accordingly,
there is substantial doubt as to whether the Company's existing cash resources and working capital are sufficient to enable it to continue its operations for the next twelve months. If the Company is
unable to obtain the necessary capital, it will be forced to license or liquidate its assets, significantly curtail or cease its operations and/or seek reorganization under the U.S. Bankruptcy Code.
The
Company has a $7.5 million secured demand facility backed by its receivables and inventory with Faunus Group International, Inc. ("FGI"). At December 31, 2015,
the Company had $3.5 million in borrowings outstanding under this facility with $4.0 million available, subject to the availability of eligible accounts receivable and inventory balances
for collateral. There is no guarantee that the Company will be able to borrow to the full limit of $7.5 million if FGI chooses not to finance a portion
F-7
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
2. Liquidity and Going Concern (Continued)
of
its receivables or inventory. Additionally, FGI can cancel the facility at any time. For additional information, refer to Note 10, "Debt".
On
May 15, 2012, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission ("SEC") (the "Shelf Registration"), which permits
the Company to sell, from time to time, up to an aggregate of $50.0 million of various securities. However, the Company may not sell its securities in a primary offering pursuant to the Shelf
Registration or any other registration statement on Form S-3 with a value exceeding one-third of its public float in any 12-month period (unless the Company's public float rises to
$75.0 million or more). On May 19, 2015, the Company filed a shelf registration statement on Form S-3 with the SEC to replace the existing Shelf Registration (the "Replacement
Shelf"), which was declared effective on November 17, 2015. The Replacement Shelf will permit the Company to sell, from time to time, up to an aggregate of $50.0 million of various
securities, provided that the Company may not sell its securities in a primary offering pursuant to the Replacement Shelf or any other registration statement on Form S-3 with a value exceeding
one-third of its public float in any 12-month period (unless the Company's public float rises to $75.0 million or more). For additional information, refer to Note 11, "Stockholders'
Equity".
On
June 2, 2015, the Company entered into an underwriting agreement to sell 2,500,000 units pursuant to the Shelf Registration for $2.05 per unit, with each unit consisting of one
share of common stock and 0.2 of one warrant to purchase one share of common stock with an exercise price of $2.65 per share. The Company received net proceeds of $4.5 million after deducting
the underwriting discounts and other offering expenses. For additional information, refer to Note 11, "Stockholders' Equity" and Note 12, "Warrants".
On
October 7, 2015, the Company and Kanis S.A. entered into a letter agreement whereby Kanis S.A. agreed to amend the terms of the outstanding loans, in the
aggregate principal amount of $7.5 million, made to the Company, such that the maturity dates of all outstanding loans were extended to October 1, 2018. For additional information, refer
to Note 10, "Debt".
On
November 23, 2015, the Company entered into a Securities and Purchase Agreement (the "Purchase Agreement") with certain institutional investors (the "Purchasers") providing for
the issuance and sale by the Company of 883,862 shares of the Company's common stock and Series B pre-funded warrants (the "Pre-Funded Warrants") to purchase an aggregate of 1,686,138 shares of
its Common Stock. The offering price was $1.22 per share of common stock and the offering price for the Pre-Funded Warrant was $1.21 for each to purchase one share of common stock. In a concurrent
private placement, the Company issued 0.3 of a Series A warrant to purchase one share of common stock for each share of common stock purchased or pre-funded through the Pre-Funded Warrants in
the registered offering. Each whole Series A Warrant can be exercised for a share of Common Stock. The Series A Warrants cover, in the aggregate, 771,000 shares of common stock at an
exercise price of $1.70 per share. In addition, in exchange for the surrender and cancellation for outstanding warrants to purchase 856,393 shares of common stock, with a weighted average exercise
price of $3.19 per share, held by the Purchasers, the Company issued Series C-1, Series C-2 and Series C-3 warrants to purchase an aggregate of 856,393 shares of common stock at
an exercise price of $1.70 per share. The Company received net proceeds of $2.6 million after deducting placement agent fees and other offering expenses. For additional information, refer to
Note 11, "Stockholders' Equity" and Note 12, "Warrants".
On
February 12, 2016, a special meeting of our stockholders was held, and at the meeting, the Company's stockholders voted to approve an amendment to our Restated Certificate of
Incorporation
F-8
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
2. Liquidity and Going Concern (Continued)
to
increase the number of authorized shares from 24,100,000 shares to 100,000,000 shares. Further, on February 12, 2016, the Company filed with the Secretary of State of Delaware a Certificate
of Amendment to the Restated Certificate of Incorporation (the "Amendment") which increased the number of authorized shares from 24,100,000 shares to 100,000,000 shares, ninety nine million nine
hundred thousand (99,900,000) of which are designated as common stock and one hundred thousand (100,000) of which are designated as preferred stock. The additional authorized shares and Replacement
Shelf registration statements are intended to provide the Company with additional flexibility to access capital markets for general corporate purposes, subject to market conditions and its capital
needs.
3. Significant Accounting Policies
The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. All
significant inter-company balances and transactions have been eliminated in consolidation.
Investments
in which the Company has at least a 20%, but not more than a 50% interest are generally accounted for under the equity method. Investment interests below 20% are generally
accounted for under the cost method, except if the Company could exercise significant influence, the investment would be accounted for under the equity method. The Company's judgment regarding the
level of influence over each equity method investment includes considering key factors such as the Company's ownership interest, representation on the board of directors, participation in
policy-making decisions and material intercompany transactions. The Company has an investment interest below 20% which is accounted for under the equity method. The Company includes its proportionate
share of the net income or loss of equity-method investees in its consolidated statements of comprehensive loss. For additional information, refer to Note 16, "Equity Investments".
In July 2014, the Company committed to a plan to sell substantially all of the assets of its Reno, Nevada-based custom fabricated
exhaust parts and accessories business (the "Reno Business"), and the sale of this business was completed in October 2014. The sale of this non-core business is expected to increase the Company's
ability to fund key investments to broaden its growing intellectual property portfolio and to bring to market new products. The Reno Business' operations are classified as discontinued operations for
all periods presented in this report. Depreciation and amortization have been eliminated from discontinued operations from the date the Company committed to the plan to sell the Reno Business. In the
statements of cash flows, the cash flows of discontinued operations are separately classified and aggregated.
Discontinued
operations also includes accruals and related costs for the Company's estimated liability to settle its ongoing indemnification matters with Johnson Matthey ("JM")
associated with the sale of Applied Utility Systems, Inc. ("AUS"), a former subsidiary of the Company, in 2009.
For
additional information, refer to Note 19, "Discontinued Operations".
All
discussions and amounts in the consolidated financial statements and related notes for all periods presented relate to continuing operations only, unless otherwise noted.
F-9
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
3. Significant Accounting Policies (Continued)
For the years ended December 31, 2015 and 2014, one automotive original equipment manufacturer ("OEM") customer within the
Catalyst segment accounted for 57% and 52%, respectively, of the Company's revenues. This customer accounted for 31% and 50% of the Company's accounts receivable at December 31, 2015 and 2014,
respectively.
For
the periods presented below, certain vendors accounted for 10% or more of the Company's raw material purchases as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
Vendor
|
|
Supplies
|
|
2015
|
|
2014
|
|
A
|
|
Substrates
|
|
|
38
|
%
|
|
27
|
%
|
B
|
|
Substrates
|
|
|
20
|
%
|
|
*
|
|
C
|
|
Substrates
|
|
|
*
|
|
|
14
|
%
|
D
|
|
Catalysts
|
|
|
*
|
|
|
10
|
%
|
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S requires management of
the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. These estimates and
assumptions are based on management's best estimates and judgment. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to impairment of goodwill and
long-lived assets, stock-based compensation, the fair value of financial instruments including warrants, allowance for doubtful accounts, inventory valuation, taxes and contingent and accrued
liabilities. The Company bases its estimates on historical experience and various other factors, including the current economic environment, which it believes to be reasonable under the circumstances.
Estimates and assumptions are adjusted when facts and circumstances dictate. Actual results may differ from these estimates under different assumptions and conditions. Management believes that the
estimates are reasonable.
Cash consists of cash balances on hand and on deposit at banks. Cash on deposit at banks at times may exceed the Federal Deposit
Insurance Corporation (FDIC) limits. The Company believes no significant concentration of credit risk exists with respect to these cash balances.
Accounts receivable are recorded at the invoiced amount and do not bear interest. Accounts receivable are presented net of a reserve
for doubtful accounts of $0.3 million at December 31, 2015 and 2014. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the
Company's existing accounts receivable. The Company
determines the allowance based on historical write-off experience and past due balances over 90 days that are reviewed
F-10
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
3. Significant Accounting Policies (Continued)
individually
for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The
Company does not have any off balance sheet credit exposure related to its customer.
Inventories are stated at the lower of cost (FIFO method) or market (net realizable value). Finished goods inventory includes
materials, labor and manufacturing overhead. The Company establishes provisions for inventory that is obsolete or when quantities on hand are in excess of estimated forecasted demand. The creation of
such provisions results in a write-down of inventory to net realizable value and a charge to cost of sales.
The
Company's inventory includes precious metals (platinum, palladium and rhodium) for use in the manufacturing of catalysts. The precious metals are valued at the lower of cost or
market, consistent with the Company's other inventory.
Property and equipment is capitalized at cost and is stated at cost less accumulated depreciation and amortization. Depreciation and
amortization is determined using the straight line method over the estimated useful lives of the various asset classes. Machinery and equipment are depreciated over 2 to 10 years; furniture and
fixtures, computer hardware and software and vehicles are depreciated over 2 to 5 years. Property and equipment held under capital leases and leasehold improvements are amortized over the
shorter of estimated useful lives or the lease term. Repairs and maintenance are charged to expense as incurred and major replacements or betterments are capitalized.
Goodwill is the excess of the purchase price of an acquired entity over the fair value of net identified tangible and intangible assets
acquired and is recorded in the reporting unit (operating segment or one level below operating segment) that is expected to benefit from the business combination. Goodwill is not amortized, but rather
tested for impairment at least annually or more often whenever events or circumstances indicate that goodwill might be impaired. The Company performs its annual impairment test as of
October 31.
Goodwill
is tested at the reporting unit level using a two-step impairment test. The first step is to compare the fair value of the reporting unit to its carrying value, including
goodwill. If the carrying value of the reporting unit exceeds the fair value, a second step is performed in order to determine the amount of impairment loss, if any. The second step compares the
implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds its implied fair value, an impairment
charge is recognized in an amount equal to that excess. Prior to performing the two-step impairment test, the Company may make a qualitative assessment of the likelihood of goodwill impairment in
order to determine whether a detailed quantitative analysis is required.
The
Company's Engine Control Systems reporting unit, which is within its Heavy Duty Diesel Systems reporting segment, contains all of the Company's allocated goodwill. The Company
performed Step 1 of the annual impairment test as of October 31, 2015 and determined that the fair value of the
F-11
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
3. Significant Accounting Policies (Continued)
Company's
reporting unit (as determined using income and market approaches) was substantially greater than the carrying amount of the respective reporting unit, including goodwill, and Step 2 was not
necessary; therefore, there was no impairment to the carrying amount of the reporting unit's goodwill. The Company has recorded no impairment charges to date for this goodwill. The Company also
determined that no subsequent events through December 31, 2015 triggered additional impairment testing; however, it is reasonably possible that future impairment tests may result in a different
conclusion for the goodwill of the Engine Control Systems reporting unit. The estimate of fair value of the reporting units is sensitive to certain factors including but not limited to the following:
movements in the Company's share price, changes in discount rates and its cost of capital, growth of the reporting unit's revenue, cost structure of the reporting unit, successful completion of
research and development and customer acceptance of new products, expected changes in emissions regulations and approval of the reporting unit's product by regulatory agencies.
The
Company's intangible assets consist of trade names, acquired patents and technology, and customer relationships and have finite lives. Intangible assets are carried at cost, less
accumulated amortization. Amortization is computed on a straight-line or accelerated basis over the estimated useful lives of the respective assets, ranging from 4 to 20 years.
Assets such as property and equipment and amortizable intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the sum of the expected undiscounted future net cash flows of an asset or
asset group is less than its carrying amount and is measured as the amount by which the carrying amount of the asset or asset group exceeds its fair value.
The Company accounts for the issuance of Company derivative equity instruments in accordance with Accounting Standards Codification
("ASC") 815-40 "Derivative and Hedging". The Company reviews common stock purchase warrants at each balance sheet date based upon the characteristics and provision of each particular instrument and
classifies them on the balance sheet as:
-
-
Equity if they (i) require physical settlement or net-share settlement, or (ii) give the Company a choice of net-cash
settlement or settlement in the Company's own shares (physical settlement or net-share settlement), or as
-
-
Liabilities if they (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs
and if that event is outside the Company's control), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement of net-share settlement).
The
Company assesses classification of common stock purchase warrants and other freestanding derivatives at each reporting date to determine whether a change in classification between
assets and liabilities and equity is required.
F-12
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
3. Significant Accounting Policies (Continued)
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against
deferred tax assets is required if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The valuation
allowance should be sufficient to reduce the deferred tax assets to the amount that is more likely than not to be realized.
The
Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Changes in recognition or measurement are reflected in the
period in which the change occurs. The Company records interest and penalties related to unrecognized tax benefit in income tax expense.
The
Company has adopted Accounting Standards Update ("ASU") No. 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes", as of December 31, 2015
to simplify the presentation of its deferred taxes. ASU No. 2015-17 provides that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as
noncurrent on the balance sheet. Each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The guidance does not change the existing requirement that only permits
offsetting within a jurisdiction. The Company is not offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The Company adopted ASU
No. 2015-17 on a prospective basis and prior periods' presentation of deferred taxes was not retrospectively adjusted.
Revenues are derived primarily from the sale of products. The Company generally recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, collection of the relevant receivable is reasonably assured, persuasive evidence of an arrangement exists and the sales price is fixed or
determinable. There are certain customers where risk of loss transfers at destination point and revenue is recognized when product is delivered to the destination. For these customers, revenue is
recognized upon receipt at the customer's warehouse. When terms of sale include subjective customer acceptance criteria, the Company defers revenue until the acceptance criteria are met. The
determination of whether or not the customer acceptance terms are perfunctory or inconsequential impacts the amount and timing of the revenue recognized.
Cost of revenue includes direct material costs and factory labor as well as factory overhead expense. Indirect factory expense includes
the costs of freight (inbound and outbound for direct materials and finished goods, respectively), purchasing and receiving, inspection, testing, warehousing, utilities and depreciation of facilities
and equipment utilized in the production and distribution of products.
F-13
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
3. Significant Accounting Policies (Continued)
o. Selling, General and Administrative Expense
Selling, general and administrative expense includes the salary and benefits for sales, marketing and administrative staff as well as
samples provided at no-cost to customers, marketing materials, travel, legal, accounting and tax consulting. Also included is any depreciation related to assets utilized in selling, general and
administrative functions as well as amortization of acquired intangible assets.
Research and development costs are generally expensed as incurred. These expenses include the salary and benefits for the research and
development staff as well as travel, research materials, testing and legal expense related to patenting intellectual property. Also included is any depreciation related to assets utilized in the
development of new products.
Equity awards consist of stock options and restricted stock units ("RSUs"). The Company measures the compensation cost for all
stock-based awards at fair value on the date of grant and recognizes it on a straight-line basis over the service period for awards expected to vest, which is generally three years.
The
Company measures the fair value of stock options using the Black-Scholes option-pricing model and certain assumptions, including the expected life of the stock options, an expected
forfeiture rate and the expected volatility of its common stock. The fair value of RSUs is based on the closing price of the Company's common stock on the grant date.
The Company provides for the estimated cost of product warranties in cost of sales, at the time product revenue is recognized. Warranty
costs are estimated primarily using historical warranty information in conjunction with current engineering assessments applied to the Company's expected repair or replacement costs.
The functional currency of the Heavy Duty Diesel Systems division's Engine Control Systems Limited subsidiary in Canada is the Canadian
dollar, while that of its subsidiary Engine Control Systems Europe AB in Sweden is the Swedish krona and the division's Clean Diesel Technologies Limited U.K. subsidiary, is the British pound
sterling. The functional currency of the Catalyst division's Japanese branch office and Asian investment is the Japanese Yen. Accordingly, the assets and liabilities of the foreign locations are
translated into U.S. dollars at period-end exchange rates. Revenue and expense accounts are translated at the average exchange rates for the period. The resulting foreign currency exchange adjustments
are charged or credited directly to other comprehensive income or loss as a separate component of stockholders' equity. Unrealized foreign currency exchange gains and losses on certain intercompany
transactions that are of a long-term investment nature (i.e. settlement is not planned or anticipated in the foreseeable future) are also recorded in other comprehensive income or loss in
stockholders' equity. Accumulated other comprehensive loss contained only foreign currency translation adjustments as of December 31, 2015 and 2014.
F-14
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
3. Significant Accounting Policies (Continued)
The
Company has exposure to multiple currencies. The primary exposure is between the U.S. dollar, the Canadian dollar, the Euro, British pound sterling and Swedish krona. Gains and
losses arising from transactions denominated in currencies other than the functional currency of the entity are included in other income (expense) in the consolidated statements of comprehensive loss.
Gains and losses arising from transactions denominated in foreign currencies are primarily related to inter-company loans that have been determined to be temporary in nature, cash, accounts receivable
and accounts payable denominated in non-functional currencies.
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss
per share is computed using the weighted average number of common shares and dilutive potential common shares. Dilutive potential common shares include employee stock options, RSUs, warrants and debt
that are convertible into the Company's common stock.
Diluted
net loss per share excludes certain dilutive potential common shares outstanding as their effect is anti-dilutive. Because the Company incurred net losses in the years ended
December 31, 2015 and 2014, the effect of potentially dilutive securities has been excluded in the computation of net loss per share as their impact would be anti-dilutive. Potentially dilutive
common stock equivalents excluded were 3.4 million and 2.3 million shares during the years ended December 31, 2015 and 2014, respectively.
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an
asset and liability. As a basis for considering such assumptions, a fair value hierarchy has been established that prioritizes the inputs used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements).
The three levels of the fair value hierarchy are as follows:
-
-
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;
-
-
Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable
including quoted prices for similar instruments in active markets and quoted prices for identical or similar instruments in markets that are not active; and
-
-
Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own
assumptions about the assumptions that market participants would use in pricing.
The
Company records its liability-classified warrants at fair value in accordance with the fair value measurement framework. The valuation inputs hierarchy classification for the warrant
liability measured at fair value on a recurring basis is summarized as follows (in thousands):
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|
|
|
|
|
|
|
|
Warrant Liability
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
December 31, 2015
|
|
|
|
|
|
|
|
$
|
3,072
|
|
December 31, 2014
|
|
|
|
|
|
|
|
$
|
1,474
|
|
F-15
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
3. Significant Accounting Policies (Continued)
The
following is a reconciliation of the warrant liability measured at fair value using Level 3 inputs (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
2014
|
|
Balance at beginning of period
|
|
$
|
1,474
|
|
$
|
939
|
|
Issuance of common stock warrants
|
|
|
4,215
|
|
|
2,978
|
|
Exercise of common stock warrants
|
|
|
|
|
|
(2,949
|
)
|
Remeasurement of common stock warrants
|
|
|
(2,617
|
)
|
|
506
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,072
|
|
$
|
1,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
additional information regarding the liability-classified warrants, refer to Note 12, "Warrants".
ASC Topic 825, "Financial Instruments", requires disclosure of the fair value of financial instruments for which the determination of
fair value is practicable. The fair values of the Company's cash, trade accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses and other current
liabilities approximate carrying values due to the short maturity of these instruments. The fair value of borrowings under the line of credit approximates their carrying value due to the variable
interest rates. The fair value of shareholder notes payable, calculated using level 3 inputs, including a Black-Scholes option-pricing model to value the debt's conversion factor and a net
present value model, was $7.5 million and $7.7 million at December 31, 2015 and 2014, respectively.
Certain
prior-period amounts have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported consolidated results of
operations or stockholders' equity. The Company reclassified $0.7 million from prepaid expenses and other current assets to income taxes payable on the consolidated balance sheet at
December 31, 2014 to net certain income taxes receivable and payable, per jurisdiction, and conform to the current period presentation.
-
x.
-
Recently Issued Accounting Guidance
In
May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". ASU No. 2014-09 supersedes the
revenue recognition requirements in "Revenue Recognition (Topic 605)". ASU No. 2014-09 requires entities to recognize revenue when it transfers promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB finalized the delay of the effective date by one
year, making the new standard effective for interim periods and annual periods beginning after December 15, 2017. Early adoption is permitted, but it is not permitted earlier than the original
effective date. ASU No. 2014-09 provides for either full retrospective adoption or a modified retrospective adoption by which it is applied only to the
F-16
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
3. Significant Accounting Policies (Continued)
most
current period presented. The Company is currently in the process of evaluating the impact of the adoption of ASU No. 2014-09 on its consolidated financial statements.
In
August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to
Continue as a Going Concern". ASU No. 2014-15 defines management's responsibility to assess an entity's ability to continue as a going concern, and to provide related footnote disclosures in
certain circumstances. It is effective for annual reporting periods ending after December 15, 2016, and for annual and interim reporting periods thereafter. Early adoption is permitted. The
Company has not elected to early adopt, and it is currently in the process of evaluating the impact of the adoption of ASU No. 2014-15 on its consolidated financial statements.
In
April 2015, the FASB issued ASU No. 2015-03, "InterestImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs". ASU
No. 2015-03 requires that debt issuance costs related to a recognized debt liability be reported on the consolidated statements of financial condition as a direct deduction from the carrying
amount of that debt liability. It is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period with early application
permitted for financial statements that have not been previously issued. The Company has not elected to early adopt, and it does not expect the impact of the adoption of ASU No. 2015-03 to be
material to its consolidated financial statements.
In
April 2015, the FASB issued ASU No. 2015-05, "IntangiblesGoodwill and OtherInternal-Use Software (Subtopic 350-40): Customer's Accounting for Fees
Paid in a Cloud Computing Arrangement". ASU No. 2015-05 provides clarification on whether a cloud computing arrangement includes a software license. If a software license is included, the
customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a software license is not included, the arrangement should be
accounted for as a service contract. It is effective for reporting periods beginning after December 15, 2015, with early adoption permitted. Entities can elect to adopt the standard update
prospectively or retrospectively to
arrangements entered into, or materially modified, after the effective date. The Company does not expect to early adopt ASU No. 2015-05, and it is currently in the process of evaluating the
impact of the adoption of ASU No. 2015-05 on its consolidated financial statements.
In
July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory". ASU No. 2015-11 changes the measurement principle for
inventory from the "lower of cost or market" to "lower of cost and net realizable value." Net realizable value is defined as the "estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal and transportation." ASU No. 2015-11 eliminates the guidance that entities consider replacement cost or net realizable value less an
approximately normal profit margin in the subsequent measurement of inventory when cost is determined on a first-in, first-out or average cost basis. It is effective for annual reporting periods
beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company has not yet determined whether it will elect to early adopt ASU
No. 2015-11, and it is currently in the process of evaluating the impact of the adoption of ASU No. 2015-11 on its consolidated financial statements.
In
January 2016, FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities". ASU No. 2016-01 requires equity investments to be
measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of
F-17
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
3. Significant Accounting Policies (Continued)
equity
investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the
method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public
business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income
the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in
accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on
the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to
available-for-sale securities in combination with the entity's other deferred tax assets. ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. The Company is currently in the process of evaluating the impact of the adoption of ASU No. 2016-01 on its consolidated
financial statements.
In
February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU No. 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases
classified as operating leases under previous U.S. generally accepted accounting principles. It is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Entities are required to recognize and measure leases at the beginning of the earliest
period presented using a modified retrospective approach. The Company is evaluating the impact of adoption of ASU No. 2016-02 on its consolidated financial statements.
4. Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
2014
|
|
Raw materials
|
|
$
|
3,894
|
|
$
|
2,744
|
|
Work in process
|
|
|
844
|
|
|
902
|
|
Finished goods
|
|
|
3,180
|
|
|
2,652
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,918
|
|
$
|
6,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
5. Property and Equipment
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
2014
|
|
Buildings and improvements
|
|
$
|
195
|
|
$
|
233
|
|
Furniture and fixtures
|
|
|
2,248
|
|
|
2,242
|
|
Computer hardware and software
|
|
|
1,370
|
|
|
1,398
|
|
Machinery and equipment
|
|
|
11,961
|
|
|
11,796
|
|
Vehicles
|
|
|
86
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
15,860
|
|
|
15,727
|
|
Less accumulated depreciation
|
|
|
(14,322
|
)
|
|
(14,370
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
1,538
|
|
$
|
1,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense was $0.4 million for each of the years ended December 31, 2015 and 2014.
6. Goodwill and Intangible Assets
The Company's Engine Control Systems reporting unit, which is within its Heavy Duty Diesel Systems reporting segment, contains all of
the Company's allocated goodwill. The change in the carrying amount of goodwill for the years ended December 31, 2015 and 2014 was due to the effect of foreign currency translation.
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Useful Life
in Years
|
|
|
|
2015
|
|
2014
|
|
Trade name
|
|
15 - 20
|
|
$
|
1,186
|
|
$
|
1,293
|
|
Patents and know-how
|
|
5 - 12
|
|
|
4,002
|
|
|
4,529
|
|
Customer relationships
|
|
4 - 8
|
|
|
724
|
|
|
837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,912
|
|
|
6,659
|
|
Less accumulated amortization
|
|
|
|
|
(4,011
|
)
|
|
(3,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,901
|
|
$
|
2,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
6. Goodwill and Intangible Assets (Continued)
Amortization expense was $0.6 million for each of the years ended December 31, 2015 and 2014. Estimated amortization expense for existing intangible assets for each of the
next five years is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Years ending December 31:
|
|
|
|
|
2016
|
|
$
|
434
|
|
2017
|
|
$
|
425
|
|
2018
|
|
$
|
161
|
|
2019
|
|
$
|
161
|
|
2020
|
|
$
|
161
|
|
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
2014
|
|
Accrued salaries and benefits
|
|
$
|
1,332
|
|
$
|
1,115
|
|
Accrued severance and other charges(1)
|
|
|
1,092
|
|
|
335
|
|
Accrued warranty(2)
|
|
|
228
|
|
|
373
|
|
Warrant liability(3)
|
|
|
3,072
|
|
|
1,474
|
|
Accrued indemnification settlement(4)
|
|
|
|
|
|
650
|
|
Liability for consigned precious metals
|
|
|
543
|
|
|
565
|
|
Other
|
|
|
1,587
|
|
|
1,677
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,854
|
|
$
|
6,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
For
additional information, refer to Note 8, "Severance and Other Charges".
-
(2)
-
For
additional information, refer to Note 9, "Accrued Warranty".
-
(3)
-
For
additional information, refer to Note 12, "Warrants".
-
(4)
-
For
additional information, refer to Note 19, "Discontinued Operations".
8. Severance and Other Charges
Severance, exit and other charges consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
2014
|
|
Employee severance expense
|
|
$
|
1,210
|
|
$
|
784
|
|
Other closure costs
|
|
|
272
|
|
|
|
|
Lease exit costs
|
|
|
|
|
|
117
|
|
Legal settlements
|
|
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
Total severance and other charges
|
|
$
|
1,482
|
|
$
|
1,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
8. Severance and Other Charges (Continued)
The
Company incurred severance costs in 2014 related to its North American and U.K. locations, including severance benefits covering a one year period for its former chief financial
officer, pursuant to a separation and release agreement. The Company incurred additional lease exit costs related to the exit of leases in North America.
The
Company incurred severance costs in 2015 related to its North American locations, including $0.8 million of severance benefits covering a one year period for our former
president and chief operating officer and our former general counsel, corporate secretary and vice president, administration, pursuant to separation and release agreements. Additionally, on
December 11, 2015, the Company announced its intention to close its Canadian manufacturing facility. Certain costs associated with this closure, primarily severance costs, totaling
$0.6 million have been accrued as of December 31, 2015, and additional costs will continue to be accrued until the ultimate closure of this facility in 2016.
The
following summarizes the activity in the Company's accrual for severance and other exit costs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
Lease Exit
Costs
|
|
Total
|
|
December 31, 2013
|
|
$
|
530
|
|
$
|
|
|
$
|
530
|
|
Provision
|
|
|
784
|
|
|
117
|
|
|
901
|
|
Payments
|
|
|
(1,021
|
)
|
|
(75
|
)
|
|
(1,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
$
|
293
|
|
$
|
42
|
|
$
|
335
|
|
Provision
|
|
|
1,210
|
|
|
|
|
|
1,210
|
|
Payments
|
|
|
(411
|
)
|
|
(42
|
)
|
|
(453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015(1)
|
|
$
|
1,092
|
|
$
|
|
|
$
|
1,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
The
Company expects to pay this accrual during the year ended December 31, 2016.
9. Accrued Warranty
Accrued warranty is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
2014
|
|
Balance at beginning of period
|
|
$
|
373
|
|
$
|
453
|
|
Accrued warranty expense
|
|
|
301
|
|
|
480
|
|
Warranty claims paid
|
|
|
(389
|
)
|
|
(524
|
)
|
Translation adjustment
|
|
|
(57
|
)
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
228
|
|
$
|
373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
10. Debt
Debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
December 31,
2014
|
|
Line of credit with FGI
|
|
$
|
3,513
|
|
$
|
2,841
|
|
$1.5 million, 8% shareholder note due 2018(1)
|
|
|
1,623
|
|
|
1,598
|
|
$3.0 million, 8% subordinated convertible shareholder notes due 2018(1)
|
|
|
2,972
|
|
|
2,947
|
|
$3.0 million, 8% shareholder note due 2018(1)
|
|
|
2,964
|
|
|
2,931
|
|
|
|
|
|
|
|
|
|
|
|
|
11,072
|
|
|
10,317
|
|
Less current portion
|
|
|
(3,513
|
)
|
|
(2,841
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
7,559
|
|
$
|
7,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Debt
discounts relate to warrants issued with shareholder notes and amendments. The aggregate amount of unamortized debt discount was $0.1 million
and $0.2 million at December 31, 2015 and 2014, respectively. For additional information, refer to the respective discussions below.
On February 14, 2011, the Company and certain of its subsidiaries (the "Credit Subsidiaries") entered into Sale and Security
Agreements with FGI to provide for a $7.5 million secured demand facility backed by its receivables and inventory. The Company and the Credit
Subsidiaries also entered into guarantees to guarantee the performance of their obligations under the Sale and Security Agreements. The Company also granted FGI a first lien collateral interest in
substantially all of its assets. On August 15, 2012, the Company and FGI agreed to amend the FGI facility. As amended, the initial term was extended from February 14, 2013 to
August 15, 2015, and the term may be extended at the Company's option for additional one-year terms. The current termination date is August 15, 2016. However, FGI can cancel the facility
at any time.
In
connection with the sale of the Reno Business, the Company's Reno, Nevada subsidiary and FGI entered into an agreement, dated October 15, 2014 (the "Termination Agreement"), to
terminate the Sale of Accounts and Security Agreement, dated February 14, 2011, between the Company subsidiary and FGI, as amended (the "Reno-FGI Financing Agreement"). Pursuant to the
Termination Agreement, the Company was required to make a final payment of $0.4 million and FGI agreed to release all encumbrances on the Reno Business' personal property under the Reno-FGI
Financing Agreement.
Under
the FGI facility, FGI can elect to purchase eligible accounts receivable from the Company and the Credit Subsidiaries at up to 80% of the value of such receivables (retaining a 20%
reserve). Purchased receivables are subject to full recourse to the Company in the event of nonpayment by the customer. FGI becomes responsible for the servicing and administration of the accounts
receivable purchased. The Company is not obligated to offer accounts in any month and FGI has the right to decline to purchase any accounts. At FGI's election, FGI may advance the Company up to 80% of
the value of any purchased accounts receivable, subject to the $7.5 million limit. Reserves retained by FGI on any purchased receivable are expected to be refunded to the Company net of
interest and fees on
F-22
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
10. Debt (Continued)
advances
once the receivables are collected from customers. The Company may also borrow against eligible inventory up to the inventory sublimit, as determined by FGI, subject to the aggregate
$7.5 million limit under the FGI facility and certain other conditions. At December 31, 2015, the inventory sublimit amount was the lesser of $1.5 million or 50% of the aggregate
purchase price paid for accounts receivable purchased under the FGI facility. While the overall credit limit and the inventory sublimit were not changed, borrowing against the Company's significant
OEM customer's inventory has been limited to $0.2 million by FGI due to their concerns about customer concentration as of December 31, 2015.
The
interest rate on advances or borrowings under the FGI facility is the greater of (i) 6.50% per annum and (ii) 2.50% per annum above the prime rate, as defined in the
FGI facility and was 6.50% at December 31, 2015 and 2014. Any advances or borrowings under the FGI facility are due on demand. The Company also agreed to pay FGI collateral management fees of
0.30% per month on the face amount of eligible receivables as to which advances have been made and 0.38% per month on borrowings against inventory, if any. At any time outstanding advances or
borrowings under the FGI facility are less than $2.4 million, the Company agreed to pay FGI standby fees of (i) the interest rate on
the difference between $2.4 million and the average outstanding amounts and (ii) 0.44% per month on 80% of the amount by which advances or borrowings are less than the agreed
$2.4 million minimum.
The
Company paid FGI a one-time facility fee of $75,000 upon entry into the FGI facility and $75,000 upon amending the FGI facility. If the Company terminates the FGI facility prior to
the last day of the initial term, as extended, or any additional term, it must pay a termination fee of 2% of the facility limit then in effect. No termination fee will be due if the Company notifies
FGI of its intent to terminate within 10 days of FGI increasing the reserve percentage for accounts to greater than 40% for more than 30 consecutive days. FGI may terminate the facility at any
time. The termination fee is not payable upon a termination by FGI or upon non-renewal.
At
December 31, 2015, the Company had $3.2 million of gross accounts receivable pledged to FGI as collateral for short-term debt in the amount of $2.0 million. At
December 31, 2015, the Company also had $1.5 million in borrowings outstanding against eligible inventory. The Company was in compliance with the terms of the FGI facility at
December 31, 2015. However, there is no guarantee that the Company will be able to borrow to the full limit of $7.5 million if FGI chooses not to finance a portion of its receivables or
inventory.
$1.5 Million, 8% Shareholder Note Due 2018
On December 30, 2010, the Company executed a Loan Commitment Letter with Kanis S.A., a shareholder of the Company,
pursuant to which Kanis S.A. loaned the Company $1.5 million. The loan is unsecured and bears interest on the unpaid principal at a rate of 6%, with interest only payable quarterly in
arrears, commencing March 31, 2011. In addition to principal and accrued interest, the Company was obligated to pay Kanis S.A. at maturity a "Payment Premium" ranging from $100,000 to
$200,000 based proportionally on the number of days that the loan remains outstanding. There is no prepayment penalty. The loan originally matured on June 30, 2013. On January 30, 2013,
the Company and Kanis S.A. agreed to amend certain terms of the loan to change the maturity date from June 30, 2013 to June 30, 2015 and to increase the interest rate from 6% to
8% beginning on June 30, 2013. In addition, the payment premium due under this note was changed to a fixed amount of $250,000 with
F-23
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
10. Debt (Continued)
$100,000
payable on June 30, 2013 and the remaining amount payable at maturity on June 30, 2015. On November 11, 2014, the Company entered into a letter agreement with
Kanis S.A., whereby Kanis S.A. agreed to amend the terms of this loan, such that the maturity date and payment premium due on
June 30, 2015 were extended to October 1, 2016. On October 7, 2015, the Company entered into a letter agreement with Kanis S.A., whereby Kanis S.A. agree to amend
the terms of this loan, such that the maturity date was extended to October 1, 2018.
On
June 28, 2013, the Company and Kanis S.A. entered into a letter agreement pursuant to which Kanis S.A. agreed that the $100,000 payment premium due
June 30, 2013 and $135,000 in accrued interest on the shareholder notes payable to Kanis S.A. as of June 30, 2013 could be paid, at the option of the Company, in cash or by
issuance of equity securities of the Company. On July 3, 2013, concurrent with the closing of its public offering, the Company issued to Kanis S.A. 188,000 shares of common stock and
warrants to purchase up to 94,000 shares of common stock at $1.25 per share, in satisfaction of the payment premium and accrued interest, as described above.
In
connection with the original loan, the Company issued Kanis S.A. warrants to acquire 25,000 shares of its common stock at $10.40 per share. In connection with a letter
agreement, dated November 11, 2014, the Company issued Kanis S.A. warrants to acquire 80,000 shares of its common stock at $1.75 per share. The relative estimated fair value of these
warrant issuances represent a discount from the face amount of the loan which has been recorded as of the respective issuance dates. The discount is being amortized using the effective interest method
over the remaining term of the loan. In connection with a letter agreement, dated October 7, 2015, the Company agreed to amend the terms of certain outstanding warrants issued to
Kanis S.A. in order to (i) extend the expiration date until November 11, 2019 and, (ii) with respect to warrants to purchase up to 75,000 shares, in total, of the Company's
common stock, reduce the exercise price to $1.75 per share. The impact of the warrant modifications, dated October 7, 2015, was not significant.
$3.0 Million, 8% Subordinated Convertible Shareholder Notes Due 2018
On April 11, 2011, the Company entered into a Subordinated Convertible Notes Commitment Letter with Kanis S.A. that
provides for the sale and issuance by the Company of 8% subordinated convertible notes (the "Convertible Notes"). As provided in this commitment letter, on May 6, 2011 Kanis S.A.
purchased from the Company at par $3.0 million aggregate principal amount of the Convertible Notes, which bear interest at a rate of 8% per annum, payable quarterly in arrears.
The
Convertible Notes have a stated maturity of five years from the date of issuance. The original agreement allowed for the acceleration of the maturity of the Convertible Notes if:
(i) the Company was in breach of the Convertible Notes or other agreements with Kanis S.A., or (ii) Kanis S.A. provided written notice, not less than 30 days prior
to such date, that it elected to accelerate the maturity to a date not earlier than November 11, 2012. On February 16, 2012, the Company and Kanis S.A. agreed to amend the terms
of the Convertible Notes to modify the early redemption date from November 11, 2012 to May 12, 2013. On January 30, 2013, the Company and Kanis S.A. entered into a letter
agreement regarding the Convertible Notes whereby Kanis S.A. agreed not to accelerate the maturity of these notes during the 2013 calendar year and on March 21, 2014, the Company and
Kanis S.A. entered into
another letter agreement whereby Kanis S.A. agreed not to accelerate the maturity of these notes prior to July 1, 2015. On November 11, 2014, the Company entered into a letter
agreement with Kanis S.A., whereby Kanis S.A. agreed to amend the terms of this loan, such that
F-24
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
10. Debt (Continued)
the
maturity date was extended to October 1, 2016 and the early redemption feature was removed. On October 7, 2015, the Company entered into a letter agreement with Kanis S.A.,
whereby Kanis S.A. agree to amend the terms of this loan, such that the maturity date was extended to October 1, 2018.
The
Convertible Notes also provide that the Company has the option to redeem the Convertible Notes at any time at a price equal to 100% of the face amount plus accrued and unpaid
interest through the date of redemption. There is no prepayment penalty. The Convertible Notes are unsecured obligations of the Company and subordinated to existing and future secured indebtedness of
the Company.
The
outstanding principal balance of the Convertible Notes plus accrued and unpaid interest were convertible into shares of the Company's common stock at an initial conversion price
equal to $7.044 per share, which was 120% of the closing bid price per share of the Company's common stock on April 8, 2011, into no more than 369,853 shares. The Company evaluated the
Convertible Notes and determined that there were no embedded derivatives contained in the Convertible Notes that require separate accounting. Additionally, there was no beneficial conversion feature
associated with the Convertible Notes since the conversion price was not lower than the estimated fair market value of the Company's common stock on the issuance date. As such, the entire proceeds
from the Convertible Notes are recorded as debt in the consolidated balance sheets.
On
July 27, 2012, the Company and Kanis S.A. further amended the terms of the Convertible Notes to modify the conversion feature. As amended, the outstanding principal
balance of the Convertible Notes, and accrued and unpaid interest are convertible, at the option of Kanis S.A., at any time upon written notice given not less than 75 calendar days prior to the
date of conversion, into no more than 250,000 shares of the Company's common stock at a conversion price of $4.00 per share. The Company evaluated the modification and determined that the modification
was not substantial and did not qualify as a debt extinguishment. Accordingly, no gain or loss was recognized from the modification.
In
connection with the February 16, 2012 amendment, the Company issued to Kanis S.A. warrants to acquire 5,000 shares of its common stock at $3.80 per share. The warrants
are exercisable on or after August 16, 2014 and expire on the earlier of (i) August 16, 2017 or (ii) that date that is 30 days after the Company gives notice to the
warrant holder that the market value of one share of its common stock has exceeded 130% of the exercise price of the warrant for 10 consecutive days on or after August 16, 2014. The Company did
not receive any cash consideration for the issuance of the warrants. The Company relied on the private placement exemption provided by Regulation S.
In
connection with a letter agreement, dated November 11, 2014, the Company issued Kanis S.A. warrants to acquire 80,000 shares of its common stock at $1.75 per share. The
relative estimated fair value of this warrant issuance represents a discount from the face amount of the loan and has been recorded as a discount from the loan amount as of the issuance date. The
discount is being amortized using the effective interest method over the remaining term of the loan. In connection with a letter agreement, dated October 7, 2015, the Company agreed to amend
the terms of certain outstanding warrants issued to Kanis S.A. in order to (i) extend the expiration date until November 11, 2019 and, (ii) with respect to warrants to
purchase up to 75,000 shares, in total, of the Company's common stock, reduce the exercise price to $1.75 per share. The impact of the warrant modifications, dated October 7, 2015, was not
significant.
F-25
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
10. Debt (Continued)
$3.0 Million, 8% Shareholder Note Due 2018
On July 27, 2012, the Company executed a Loan Commitment Letter with Kanis S.A., pursuant to which the Company issued a
promissory note in the principal amount of $3.0 million, which bears interest at 8% per annum, payable quarterly in arrears. The promissory note was due on July 27, 2015. There is no
prepayment penalty or premium, and the promissory note is unsecured. On November 11, 2014, the Company entered into a letter agreement with Kanis S.A., whereby Kanis S.A. agreed
to amend the terms of this loan, such that the maturity date was extended to October 1, 2016. On October 7, 2015, the Company entered into a letter agreement with Kanis S.A.,
whereby Kanis S.A. agree to amend the terms of this loan, such that the maturity date was extended to October 1, 2018.
In
connection with the promissory note, dated July 27, 2012, the Company issued Kanis S.A. a warrant to acquire 45,000 shares of its common stock at $2.09 per share, a
third of which becomes exercisable on the issuance date and each of the first and second anniversaries of the issuance date. This warrant expires on July 27, 2018. The Company did not receive
any cash consideration for the issuance of this warrant, which was issued in reliance upon the private placement exemption provided by Regulation S. In connection with a letter agreement, dated
November 11, 2014, the Company issued Kanis S.A. warrants to acquire 80,000 shares of its common stock at $1.75 per share. The relative estimated fair values of these warrant issuances
represent a discount from the face amount of the loan which has been recorded as of the respective issuance dates. The discount is being amortized using the effective interest method over the
remaining term of the loan. In connection with a letter agreement, dated October 7, 2015, the Company agreed to amend the terms of certain outstanding warrants issued to Kanis S.A. in
order to (i) extend the expiration date until November 11, 2019 and, (ii) with respect to warrants to purchase up to 75,000 shares, in total, of the Company's common stock, reduce
the exercise
price to $1.75 per share. The impact of the warrant modifications, dated October 7, 2015, was not significant.
For
additional information on the warrants discussed within this Note, refer to Note 11, "Stockholders' Equity" and Note 12 "Warrants", respectively.
Annual
scheduled principal payments of debt based on earliest redemption date as of December 31, 2015 are (in thousands):
|
|
|
|
|
|
|
|
|
Years ending December 31:
|
|
|
|
|
2016
|
|
$
|
3,663
|
|
2018
|
|
|
7,500
|
|
|
|
|
|
|
Total
|
|
$
|
11,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Stockholders' Equity
On May 15, 2012, the Company filed a Shelf Registration which was declared effective by the SEC on May 21, 2012. The
Shelf Registration permits the Company to sell, from time to time, up to an aggregate of $50.0 million of various securities, including common stock, preferred stock, warrants to purchase
common stock or preferred stock and units consisting of one or more shares of common stock, shares of preferred stock, warrants, or any combination of such securities. However, the
F-26
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
11. Stockholders' Equity (Continued)
Company
may not sell its securities in a primary offering pursuant to the Shelf Registration or any other registration statement on Form S-3 with a value exceeding one-third of its public float
in any 12-month period (unless the Company's public float rises to $75.0 million or more). The Shelf Registration was intended to provide the Company with additional flexibility to access
capital markets for general corporate purposes, subject to market conditions and the Company's capital needs.
On
May 19, 2015, the Company filed a Replacement Shelf registration statement on Form S-3 with the SEC to replace the existing Shelf Registration, which it was declared
effective on November 17, 2015. The Replacement Shelf will permit the Company to sell, from time to time, up to an aggregate of
$50.0 million of various securities, provided that the Company may not sell its securities in a primary offering pursuant to the Replacement Shelf or any other registration statement on
Form S-3 with a value exceeding one-third of its public float in any 12-month period (unless the Company's public float rises to $75.0 million or more). The Replacement Shelf is intended
to provide the Company with additional flexibility to access capital markets for general corporate purposes, subject to market conditions and the Company's capital needs.
On April 1, 2014, the Company entered into subscription agreements with certain investors who agreed to purchase an aggregate of
2,030,000 shares of the Company's common stock together with warrants to purchase up to 812,000 shares of common stock (the "April 2014 Offering"). This offering was made pursuant to the Company's
Shelf Registration, and closed on April 4, 2014. The securities were sold in units consisting of one share of common stock and 0.4 of a warrant to purchase one share of common stock for a price
of $3.40 per unit.
The
Company received gross proceeds of $6.9 million and net proceeds of $6.1 million after deducting placement agent fees and other offering expenses. The April 2014
Offering warrants are within the scope of ASC 815-40 and are required to be recorded as liabilities. Accordingly, of the $6.1 million in net proceeds, $4.6 million was allocated to the
common stock and included in equity and $1.5 million was allocated to the warrant liability based on the fair value of the warrants on the issuance date. Additionally, $0.2 million of
the placement agent fees and other offering costs were allocated to the warrants, based on the relative fair value of the April 2014 Offering warrants and the common stock on the issuance date, and
was included in other income (expense), net in the accompanying statement of comprehensive loss for the year ended December 31, 2014. The Company used the net proceeds for general corporate
purposes, including working capital, general and administrative expenses, capital expenditures and implementation of its strategic priorities, and to repay a portion of amounts outstanding under its
line of credit.
On November 4, 2014, the Company entered into subscription agreements with certain investors who agreed to purchase an aggregate
of 1,385,000 shares of the Company's common stock, Series A Warrants to purchase up to an aggregate of 388,393 shares of common stock with an exercise price of $3.25 per share, for a combined
purchase price of $2.80 per share and 0.28 of one Series A Warrant, and Series B Warrants to purchase up to an aggregate of 168,571 shares of common stock with an exercise price of $0.01
per share for a purchase price of $2.79 per Series B Warrant, pursuant to the Shelf Registration (the "November 2014 Offering").
F-27
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
11. Stockholders' Equity (Continued)
The Company received gross proceeds of $4.4 million and net proceeds of $3.8 million after deducting placement agent fees and other offering expenses. The November 2014
Offering warrants are within the scope of ASC 815-40 and are required to be recorded as liabilities. Accordingly, of the $3.8 million in net proceeds, $2.5 million was allocated to the
common stock and included in equity and $1.3 million was allocated to the warrant liability based on the fair value of the warrants on the issuance date. Additionally, $0.1 million of
the placement agent fees and other offering costs were allocated to the warrants, based on the relative fair value of the November 2014 Offering warrants and the common
stock on the issuance date, and was included in other income (expense), net in the accompanying statement of comprehensive loss for the year ended December 31, 2014. The Company intends to use
the net proceeds for general corporate purposes, which may include working capital, general and administrative expenses, capital expenditures and implementation of its strategic priorities. The
Company may also use a portion of the net proceeds to acquire or invest in businesses, products and technologies that are complementary to its current business, although there are no present
commitments or agreements for any such transactions.
On June 2, 2015, the Company entered into an underwriting agreement with Cowen and Company, LLC, as the representative of
the several underwriters identified therein, pursuant to which the Company agreed to offer and sell up to 2,500,000 units at a price to the public of $2.05 per unit (the "June 2015 Offering"). Each
unit consisted of one share of common stock and 0.2 of a warrant to purchase one share of common stock. The June 2015 Offering warrants have an exercise price of $2.65 per share and can be exercised
during the period commencing after six months and ending five and a half years from the date of issuance.
The
Company received gross proceeds of $5.1 million and net proceeds of $4.5 million after deducting the underwriting discounts and other offering expenses. The June 2015
Offering warrants are within the scope of ASC 815-40 and are required to be recorded as liabilities. Accordingly, of the $4.5 million in net proceeds, $3.7 million was allocated to the
common stock and included in equity and $0.8 million was allocated to the warrant liability based on the fair value of the warrants on the issuance date. Additionally, $0.1 million of
the underwriter discounts and other offering costs were allocated to the June 2015 Offering warrants, based on the relative fair value of the June 2015 Offering warrants and the common stock on the
issuance date, and was included in other income (expense), net in the accompanying statements of comprehensive loss for the year ended December 31, 2015. The Company intends to use the net
proceeds for general corporate purposes, which may include working capital, general and administrative expenses, capital expenditures and implementation of its strategic priorities. The Company may
also use a portion of the net proceeds to acquire or invest in businesses, products and technologies that are complementary to its current business, although there are no present commitments or
agreements for any such transactions.
On November 23, 2015, the Company entered into a securities and purchase agreement with certain institutional investors (the
"Purchasers") providing for the issuance and sale by the Company of 883,862 shares of the Company's common stock and Series B pre-funded
warrants (the "Pre-Funded Warrants") to purchase an aggregate of 1,686,138 shares of its common stock. The offering price was $1.22 per share of common stock and the offering price for the Pre-Funded
Warrant was $1.21 for each
F-28
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
11. Stockholders' Equity (Continued)
to
purchase one share of common stock. The Pre-Funded Warrants are immediately exercisable at an exercise price of $0.01 per share and expire two years from the date of issuance. In a concurrent
private placement, the Company issued 0.3 of a Series A warrant to purchase one share of common stock for each share of common stock purchased or pre-funded through the Pre-Funded Warrants in
the registered offering. Each whole Series A Warrant can be exercised for a share of Common Stock. The Series A Warrants cover, in the aggregate, 771,000 shares of common stock and
become exercisable seven months following the date of issuance at an exercise price of $1.70 per share and expire five years from the date they become exercisable. In addition, in exchange for the
surrender and cancellation for outstanding warrants to purchase 856,393 shares of common stock, with a weighted average exercise price of $3.19 per share, held by the Purchasers, the Company issued
Series C-1, Series C-2 and Series C-3 warrants to purchase an aggregate of 856,393 shares of common stock which will become exercisable seven months following the date of issuance
at an exercise price of $1.70 per share. Each Exchange Warrant will expire seven months from the expiration date set forth in the corresponding cancelled warrant. The transactions noted just above are
collectively referred to as the "November 2015 Offering".
The
Company received gross proceeds of $3.1 million and net proceeds of $2.6 million after deducting placement agent fees and other offering expenses. Accordingly, of the
$3.1 million in gross proceeds initially included in equity, $0.1 million of the offering costs were allocated to common stock, based on the relative fair value of the common stock and
the November 2015 Offering warrants on the issuance date. The November 2015 Offering warrants are within the scope of ASC 815-40 and are required to be recorded as liabilities. Accordingly,
$3.4 million was allocated to the warrant liability based on the fair value of the warrants on the issuance date. As the assigned fair values of the November 2015 Offering warrants were greater
than the net cash proceeds allocated to common stock, the $0.4 million excess was treated as offering costs and included in other income (expense), net in the accompanying statements of
comprehensive loss for the year ended December 31, 2015, along with the $0.4 million of offering costs allocated to the November 2015 Offering warrants. The Company intends to use the
net proceeds for general corporate purposes, which may include working capital, general and administrative expenses, capital expenditures and implementation of its strategic priorities. The Company
may also use a portion of the net proceeds to acquire or invest in businesses, products and technologies that are complementary to its current business, although there are no present commitments or
agreements for any such transactions.
In connection with a letter agreement, dated November 11, 2014, the Company issued Kanis S.A. warrants to acquire 80,000
shares of its common stock at $1.75 per share for a five year period. The Company did not receive any cash consideration for the issuance of this warrant, which was issued in reliance upon the private
placement exemption provided by Regulation S. For additional information, refer to Note 10, "Debt".
For
additional information on the warrants discussed within this Note, refer to Note 12, "Warrants".
12. Warrants
From time to time, the Company issues warrants to purchase its common stock. Warrants have been issued for consulting services, in connection with the Company's issuance of debt and
sales of its
F-29
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
12. Warrants (Continued)
common
stock. For additional information regarding the warrants discussed in this Note, refer to Note 10, "Debt" and Note 11 "Stockholders' Equity", respectively.
Warrants
activity is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares(1)
|
|
Weighted
Average
Exercise
Price
|
|
Range of
Exercise Prices
|
Outstanding at December 31, 2013
|
|
|
1,139,535
|
|
$
|
1.68
|
|
$1.25 - $10.40
|
Issued
|
|
|
1,448,964
|
|
$
|
3.32
|
|
$0.01 - $4.20
|
Exercised
|
|
|
(968,571
|
)
|
$
|
1.03
|
|
$0.01 - $1.25
|
Expired
|
|
|
(9,859
|
)
|
$
|
2.80
|
|
$2.80
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
1,610,069
|
|
$
|
3.54
|
|
$1.25 - $10.40
|
Issued
|
|
|
2,957,138
|
|
$
|
0.90
|
|
$0.01 - $2.65
|
Exchange warrants issued
|
|
|
856,393
|
|
$
|
1.70
|
|
$1.70
|
Exchange warrants surrendered
|
|
|
(856,393
|
)
|
$
|
3.19
|
|
$2.65 - $4.20
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
4,567,207
|
|
$
|
1.49
|
(2)
|
$0.01 - $4.50(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2015
|
|
|
2,939,814
|
|
$
|
1.37
|
|
$0.01 - $4.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Outstanding
and exercisable information includes 170,676 equity-classified warrants.
-
(2)
-
Includes
the effects of repricing. Refer to the Warrant Liability discussion below for additional information.
The Company evaluated the following warrants on issuance and at each reporting date to determine proper classification as equity or as
a liability.
|
|
|
|
|
|
|
|
Issuance
|
|
|
|
|
Date
|
|
Quantity
|
|
Key Considerations
|
|
Classification
|
April 2014
|
|
|
812,000
|
|
Require settlement in registered
shares
|
|
Liability
|
|
|
|
|
|
Cash payment provision for failure to timely
deliver
|
|
|
November 2014
|
|
|
556,964
|
|
Require settlement in registered
shares
|
|
Liability
|
|
|
|
(1)
|
|
Cash payment provision for failure to timely
deliver
|
|
|
November 2014
|
|
|
80,000
|
|
Require settlement in registered
shares
|
|
Liability
|
|
|
|
|
|
Include full-ratchet down-round price
protection
|
|
|
June 2015
|
|
|
500,000
|
|
Require settlement in registered
shares
|
|
Liability
|
|
|
|
|
|
Cash payment provision for failure to timely
deliver
|
|
|
November 2015
|
|
|
2,457,138
|
|
Require settlement in registered
shares
|
|
Liability
|
|
|
|
(2)
|
|
Cash payment provision for failure to timely
deliver
|
|
|
-
(1)
-
Includes
388,393 Series A Warrants and 168,571 Series B Warrants.
-
(2)
-
Includes
771,000 Series A Warrants and 1,686,138 Series B Warrants.
F-30
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
12. Warrants (Continued)
The Company's warrant liability is carried at fair value and is classified as Level 3 in the fair value hierarchy because the
warrants are valued based on unobservable inputs.
The
Company determines the fair value of its warrant liability using the Black-Scholes option-pricing model unless the awards are subject to market conditions, in which case it uses a
Monte Carlo simulation model, which utilizes multiple input variables to estimate the probability that market conditions will be achieved. These models are dependent on several variables such as the
instrument's expected term, expected strike price, expected risk-free interest rate over the expected term of the instrument, expected dividend yield rate over the expected term and the expected
volatility. The expected strike price for warrants with full-ratchet down-round price protection is based on a weighted average probability analysis of the strike price changes expected during the
term as a result of the full-ratchet down-round price protection.
Due
to the significant change in the Company following its business combination with Catalytic Solutions, Inc. (the "Merger"), CDTi's pre-Merger historical price volatility was
initially not considered representative of expected volatility going forward. Therefore, for warrants with an expected term that required a volatility look-back that pre-dates the Merger, the Company
used an estimate based upon a weighted average of implied and historical volatility of a portfolio of peer companies and CDTi's post-Merger historical volatility for the valuation of these warrants.
For warrants with an expected term that does not require a volatility look-back that pre-dates the Merger, CDTi's post-Merger historical price volatility was considered representative of expected
volatility going forward, and accordingly, only CDTi's historical volatility was used for the valuation of these warrants. The expected life is equal to the remaining contractual life of the warrants.
The
assumptions used in the Black-Scholes option-pricing model to estimate the fair value of the warrant liability for these warrants outstanding are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
Issued
April 4,
2014
|
|
|
|
2015(1)
|
|
2015
|
|
2014
|
|
Number of warrants
|
|
|
148,000
|
|
|
664,000
|
|
|
812,000
|
|
|
812,000
|
|
CDTi stock price
|
|
$
|
0.94
|
|
$
|
0.94
|
|
$
|
1.81
|
|
$
|
2.95
|
|
Strike price
|
|
$
|
1.70
|
|
$
|
4.20
|
|
$
|
4.20
|
|
$
|
4.20
|
|
Expected volatility(2)
|
|
|
96.7
|
%
|
|
94.4
|
%
|
|
86.6
|
%
|
|
84.9
|
%
|
Risk-free interest rate
|
|
|
1.6
|
%
|
|
1.5
|
%
|
|
1.6
|
%
|
|
1.9
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life in years
|
|
|
4.4
|
|
|
3.8
|
|
|
4.8
|
|
|
5.5
|
|
-
(1)
-
Concurrent
with the November 2015 offering, these warrants were exchanged for warrants with a different strike price and term.
F-31
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
12. Warrants (Continued)
-
(2)
-
During
2015, the Company's Post-Merger historical volatility began to be considered representative of expected volatility for these warrants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Issued November 4, 2014
|
|
|
|
2015(1)
|
|
2014
|
|
Series A
|
|
Series B(2)
|
|
Number of warrants
|
|
|
388,393
|
|
|
388,393
|
|
|
388,393
|
|
|
168,571
|
|
CDTi stock price
|
|
$
|
0.94
|
|
$
|
1.81
|
|
$
|
3.04
|
|
$
|
3.04
|
|
Strike price
|
|
$
|
1.70
|
|
$
|
3.25
|
|
$
|
3.25
|
|
$
|
0.01
|
|
Expected volatility
|
|
|
96.6
|
%
|
|
86.5
|
%
|
|
87.1
|
%
|
|
|
|
Risk-free interest rate
|
|
|
1.6
|
%
|
|
1.6
|
%
|
|
1.6
|
%
|
|
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life in years
|
|
|
4.4
|
|
|
4.9
|
|
|
5.0
|
|
|
|
|
-
(1)
-
Concurrent
with the November 2015 offering, these warrants were exchanged for warrants with a different strike price and term.
-
(2)
-
Due
to the $0.01 strike price, fair value equals CDTi stock price minus the strike price.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
Issued
June 8,
2015
|
|
|
|
2015(1)
|
|
2015
|
|
Number of warrants
|
|
|
320,000
|
|
|
180,000
|
|
|
500,000
|
|
CDTi stock price
|
|
$
|
0.94
|
|
$
|
0.94
|
|
$
|
2.09
|
|
Strike price
|
|
$
|
1.70
|
|
$
|
2.65
|
|
$
|
2.65
|
|
Expected volatility
|
|
|
110.3
|
%
|
|
102.3
|
%
|
|
114.6
|
%
|
Risk-free interest rate
|
|
|
1.8
|
%
|
|
1.7
|
%
|
|
1.8
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
Expected life in years
|
|
|
5.5
|
|
|
4.9
|
|
|
5.5
|
|
-
(1)
-
Concurrent
with the November 2015 offering, these warrants were exchanged for warrants with a different strike price and term.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Issued November 27, 2015
|
|
|
|
Series A
|
|
Series B(1)
|
|
Series A
|
|
Series B(1)
|
|
Number of warrants
|
|
|
771,000
|
|
|
1,686,138
|
|
|
771,000
|
|
|
1,686,138
|
|
CDTi stock price
|
|
$
|
0.94
|
|
$
|
0.94
|
|
$
|
1.39
|
|
$
|
1.39
|
|
Strike price
|
|
$
|
1.70
|
|
$
|
0.01
|
|
$
|
1.70
|
|
$
|
0.01
|
|
Expected volatility
|
|
|
96.6
|
%
|
|
|
|
|
110.3
|
%
|
|
|
|
Risk-free interest rate
|
|
|
1.8
|
%
|
|
|
|
|
1.7
|
%
|
|
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life in years
|
|
|
5.5
|
|
|
|
|
|
5.6
|
|
|
|
|
-
(1)
-
Due
to the $0.01 strike price, fair value equals CDTi stock price minus the strike price.
F-32
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
12. Warrants (Continued)
The
assumptions used in the Monte Carlo simulation model to estimate the fair value of the warrant liability for the following warrants, as of their respective issuance dates, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015(1)
|
|
2015
|
|
2014
|
|
Number of warrants
|
|
|
94,000
|
|
|
65,000
|
|
|
159,000
|
|
CDTi stock price
|
|
$
|
0.94
|
|
$
|
0.94
|
|
$
|
1.81
|
|
Strike price
|
|
$
|
1.22
|
|
$
|
1.25
|
|
$
|
1.25
|
|
Expected volatility
|
|
|
95.5
|
%
|
|
99.1
|
%
|
|
103.6
|
%
|
Risk-free interest rate
|
|
|
1.5
|
%
|
|
1.2
|
%
|
|
1.2
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
Expected life in years
|
|
|
3.9
|
|
|
2.5
|
|
|
3.5
|
|
-
(1)
-
Concurrent
with the November 2015 offering, the strike price for these warrant were reset due, per the full-ratchet down-round price protection provision.
In connection with a letter agreement, dated October 7, 2015, the Company agreed to amend the term of these warrants in order to extend the expiration date until November 11, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
Issued
November 11,
2014
|
|
|
|
2015
|
|
2014
|
|
Number of warrants
|
|
|
80,000
|
|
|
80,000
|
|
|
80,000
|
|
CDTi stock price
|
|
$
|
0.94
|
|
$
|
1.81
|
|
$
|
2.46
|
|
Strike price(1)
|
|
$
|
1.22
|
|
$
|
1.75
|
|
$
|
1.75
|
|
Expected volatility(2)
|
|
|
95.5
|
%
|
|
77.0
|
%
|
|
76.6
|
%
|
Risk-free interest rate
|
|
|
1.5
|
%
|
|
1.6
|
%
|
|
1.7
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
Expected life in years
|
|
|
3.9
|
|
|
4.9
|
|
|
5.0
|
|
-
(1)
-
Concurrent
with the November 2015 offering, the strike price for these warrants were reset, per the full-ratchet down-round price protection provision.
-
(2)
-
During
2015, the Company's Post-Merger historical volatility began to be considered representative of expected volatility for these warrants.
The
warrant liability, included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets, is re-measured at the end of each reporting period with
changes in fair value recognized in other income (expense), net in the consolidated statements of comprehensive loss. Upon the exercise of a warrant that is classified as a liability, the fair value
of the warrant exercised is re-measured on the exercise date and reclassified from warrant liability to additional paid-in capital.
F-33
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
13. Stock-Based Compensation
The Clean Diesel Technologies, Inc. Stock Incentive Plan (formerly known as the Clean Diesel Technologies, Inc. 1994 Incentive Plan), as amended (the "Plan"), provides for
the awarding of incentive stock options, non-qualified stock options, stock appreciation rights, restricted shares, performance awards, bonuses or other forms of share-based awards, or combinations of
these to the Company's directors, officers, employees, consultants and advisors (except consultants or advisors in capital-raising transactions) as determined by the board of directors. At the
Company's Annual Meeting of Shareholders held on May 23, 2012, the Company's shareholders approved certain amendments to the
Plan, the most significant of which changed the Plan name, removed the evergreen provision and established a maximum number of 1.4 million shares to be reserved for issuance under the Plan,
disallowed the repricing of outstanding stock options without shareholder approval, removed the ability to issue cash bonus awards under the Plan and modified the change in control provisions within
the Plan. As of December 31, 2015, there were 203,202 shares available for future grants under the Plan.
Total
stock-based compensation expense was $0.8 million and $0.6 million for the years ended December 31, 2015 and 2014, respectively.
Stock option activity is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
(thousands)
|
|
Outstanding at December 31, 2014
|
|
|
447,923
|
|
$
|
8.74
|
|
|
|
|
|
|
|
Granted
|
|
|
974,424
|
|
$
|
1.84
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(137,483
|
)
|
$
|
3.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
1,284,864
|
|
$
|
4.00
|
|
|
7.7
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2015
|
|
|
456,776
|
|
$
|
8.05
|
|
|
4.1
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value represents the difference between the exercise price and the Company's closing stock price on the last trading day of the year.
Stock
options granted under the Plan typically expire ten years from the date of grant and are issued at a price equal to the fair market value of the underlying stock on the date of
grant. The Company's board of directors may establish such vesting and other conditions with respect to options as it deems appropriate.
The
Company estimates the fair value of stock options using a Black-Scholes option-pricing model. The Company did not grant any stock options during the year ended December 31,
2014, and the
F-34
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
13. Stock-Based Compensation (Continued)
weighted-average
assumptions and grant date fair value for the year ended December 31, 2015 were as follows:
|
|
|
|
|
Expected volatility
|
|
|
126.0
|
%
|
Risk-free interest rate
|
|
|
1.7
|
%
|
Dividend yield
|
|
|
|
|
Expected life in years
|
|
|
5.4
|
|
Weighted average grant date fair value
|
|
$
|
1.52
|
|
The
expected term of the options has historically been based upon the historical term until exercise or expiration of all granted options. Due to the significant change in the Company
following the Merger and significant change in the terms of the options granted, CDTI's pre-Merger historical exercise data was not considered to provide a reasonable basis for estimating the expected
term for current option grants. As such, the expected term of stock options granted in 2015 was determined using the "simplified method" as allowed under ASC 718-10-S99,
"CompensationStock Compensation: Overall: SEC Materials." The "simplified method" calculates the expected term as the average of the vesting term and original contractual term of the
options. The expected volatility is based on the volatility of the Company over the corresponding expected term of the option. The risk-free interest rate is the constant maturity rate published by
the U.S. Federal Reserve Board that corresponds to the expected term of the option. The dividend yield is assumed as 0% because the Company has not paid dividends and does not expect to pay dividends
in the future.
Compensation
costs for stock options that vest over time are recognized over the vesting period on a straight-line basis. As of December 31, 2015, the Company had
$1.1 million of unrecognized compensation cost related to stock option grants that remained to be recognized over vesting periods. These costs are expected to be recognized over a weighted
average period of 1.6 years.
RSU activity is as follows:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average Grant
Date Fair Value
|
|
Nonvested at December 31, 2014
|
|
|
352,766
|
|
$
|
2.35
|
|
Granted
|
|
|
122,120
|
|
$
|
1.87
|
|
Vested
|
|
|
(262,689
|
)
|
$
|
2.34
|
|
Forfeited
|
|
|
(12,555
|
)
|
$
|
4.18
|
|
|
|
|
|
|
|
|
|
Nonvested units at December 31, 2015
|
|
|
199,642
|
|
$
|
2.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2015, the Company had approximately $0.3 million of unrecognized compensation expense related to RSUs, which will be recognized over a weighted average
estimated remaining life of 1.0 years.
F-35
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
14. Other Income (Expense), Net
Other income (expense), net, consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
2014
|
|
Gain (loss) on change in fair value of liability-classified warrants
|
|
$
|
2,617
|
|
$
|
(506
|
)
|
Offering costs
|
|
|
(833
|
)
|
|
(293
|
)
|
Income (loss) from unconsolidated affiliates
|
|
|
37
|
|
|
46
|
|
Foreign currency exchange gain
|
|
|
838
|
|
|
549
|
|
Other
|
|
|
5
|
|
|
30
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
2,664
|
|
$
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Income Taxes
Income (loss) from continuing operations before income taxes include the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
2014
|
|
U.S.-based operations
|
|
$
|
(7,770
|
)
|
$
|
(9,979
|
)
|
Non U.S.-based operations
|
|
|
(1,051
|
)
|
|
1,004
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(8,821
|
)
|
$
|
(8,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit) attributable to loss from continuing operations is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
Deferred
|
|
Total
|
|
Year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
State and local
|
|
$
|
4
|
|
|
|
|
$
|
4
|
|
Foreign
|
|
|
(269
|
)
|
|
(134
|
)
|
|
(403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(265
|
)
|
$
|
(134
|
)
|
$
|
(399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
4
|
|
|
|
|
$
|
4
|
|
State and local
|
|
|
17
|
|
|
|
|
|
17
|
|
Foreign
|
|
|
444
|
|
|
(327
|
)
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
465
|
|
$
|
(327
|
)
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
15. Income Taxes (Continued)
Income
taxes attributable to loss from continuing operations differ from the amounts computed by applying the U.S. federal statutory rate of 34% to loss from continuing operations before
income taxes as shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
2014
|
|
Expected tax benefit
|
|
$
|
(2,999
|
)
|
$
|
(3,052
|
)
|
Net tax effects of:
|
|
|
|
|
|
|
|
Foreign tax rate differential
|
|
|
167
|
|
|
(214
|
)
|
State taxes, net of federal benefit
|
|
|
(602
|
)
|
|
(381
|
)
|
Return to provision adjustment
|
|
|
(619
|
)
|
|
(579
|
)
|
Research and other credits
|
|
|
(59
|
)
|
|
(92
|
)
|
Permanent difference on Convertible Notes and warrants
|
|
|
(589
|
)
|
|
277
|
|
Expiring net operating loss carryforwards
|
|
|
|
|
|
2,441
|
|
Other
|
|
|
52
|
|
|
175
|
|
Change in deferred tax asset valuation allowance
|
|
|
4,250
|
|
|
1,563
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(399
|
)
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets and liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
2014
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Research and development credits
|
|
$
|
2,763
|
|
$
|
2,054
|
|
Other credits
|
|
|
487
|
|
|
378
|
|
Operating loss carry forwards
|
|
|
17,249
|
|
|
13,974
|
|
Inventories
|
|
|
254
|
|
|
282
|
|
Allowance for doubtful accounts
|
|
|
116
|
|
|
321
|
|
Depreciation
|
|
|
382
|
|
|
400
|
|
Deferred research and development expenses for income tax
|
|
|
240
|
|
|
327
|
|
Non-cash compensation
|
|
|
1,120
|
|
|
1,176
|
|
Other
|
|
|
921
|
|
|
410
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
23,532
|
|
|
19,322
|
|
Valuation allowance
|
|
|
(23,091
|
)
|
|
(18,856
|
)
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
441
|
|
$
|
466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Other identifiable intangible assets
|
|
$
|
(634
|
)
|
$
|
(825
|
)
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
(634
|
)
|
|
(825
|
)
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(193
|
)
|
$
|
(359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company had approximately $43.0 million and $27.7 million of federal and state income tax net operating loss carryforwards at December 31, 2015, respectively.
The foreign net operating losses
F-37
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
15. Income Taxes (Continued)
can
be carried forward indefinitely. Future utilization of the federal and state net operating losses and credit carryforwards is subject to a substantial annual limitation due to ownership change
limitations as required by Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the "Code"), as well as similar state limitations.
The
Company performed a study to evaluate the status of net operating loss carryforwards as a result of the ownership change from the Merger. The results of the study provided that the
merger caused an "ownership change" of the Company as defined for U.S. federal income tax purposes as of the date of the merger. The "ownership change" will significantly limit the use of the
Company's net operating losses and credits in future tax years. Of the $43.0 million federal loss carryforwards approximately $4.9 million of the loss will be subject to an annual
limitation of $0.4 million within the next 5 years and $0.2 million for the following 15 years. The federal net operating loss carryforwards will expire in fiscal year
2035. As a result of the "ownership change" the federal research and development credits have been limited and based on the limitation the Company does not anticipate being able to use any of these
credits that existed as of the date of the Merger in future tax years. However, the Company has approximately $0.7 million in research and development credits post-Merger which is not subject
to any limitation. Of the $27.7 million of state net operating loss carryforwards approximately $1.4 million of the loss will be subject to an annual limitation of $0.1 for the next
20 years. The state net operating loss carryforwards will expire in fiscal year 2035. The Company has state research and development credits of $3.1 million. Since the state credits have
an indefinite life, the Company did not write them off even though it is also limited under Section 383. The Company has a full valuation allowance against the related deferred tax assets for
its U.S. and U.K. entities as it is more likely than not that they will not be realized by the Company.
In
assessing the potential realization of deferred tax assets, consideration is given to whether it is more likely than not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during the periods in which those temporary differences become deductible. In
addition, the utilization of net operating loss carryforwards may be limited due to restrictions imposed under applicable federal and state tax laws due to a change in ownership. Based upon the level
of historical operating losses and future projections, management believes it is more likely than not that the Company will not realize the deferred tax assets.
The
Company has not recognized a deferred tax liability on undistributed earnings of its foreign subsidiaries, because these earnings are intended to be permanently reinvested. The
amount of the unrecognized deferred tax liability depends on judgment required to analyze the withholding tax due, the applicable tax law and factual circumstances in effect at the time of any such
distributions. Therefore, the Company believes it is not practicable at this time to reliably determine the amount of unrecognized deferred tax liability related to its undistributed earnings;
however, these undistributed earnings are immaterial. If circumstances change and it becomes apparent that some or all of the undistributed earnings of a subsidiary will be remitted and income taxes
have not been recognized by
the parent entity, the parent entity shall accrue as an expense of the current period income taxes attributable to that remittance.
F-38
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
15. Income Taxes (Continued)
The
following changes occurred in the amount of unrecognized tax benefits including related interest and penalties (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
2014
|
|
Balance at beginning of year
|
|
$
|
683
|
|
$
|
543
|
|
Additions for current year tax provisions
|
|
|
32
|
|
|
140
|
|
Reduction for prior year tax provisions
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
634
|
|
$
|
683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If
recognized, the entire amount of the unrecognized tax benefits would affect the effective tax rate. As of December 31, 2015 and 2014, the Company had $0.1 million and
$0.2 million, respectively, accrued for payment of interest and penalties related to unrecognized tax benefits.
The
Company operates in multiple tax jurisdictions, both within and outside of the United States. Although the timing of the resolution and/or closure of audits is not certain, the
Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next twelve months. The following tax years remain open to examination by the major
domestic taxing jurisdictions to which it is subject:
|
|
|
|
|
Open Tax Years
|
United StatesFederal
|
|
2012 - 2015
|
United StatesState
|
|
2011 - 2015
|
Canada
|
|
2010 - 2015
|
Sweden
|
|
2013 - 2015
|
United Kingdom
|
|
2011 - 2015
|
16. Equity Investments
On February 19, 2013, the Company entered into a joint venture agreement (the "Joint Venture Agreement") with Pirelli &
C. Ambiente SpA ("Pirelli") to form a joint venture entity, Eco Emission Enterprise Srl under the laws of Italy (the "Joint Venture"). The Joint Venture Agreement provided that the Company and
Pirelli each held 50% of the total issued share capital of the Joint Venture. The Company accounted for its investment in the Joint Venture using the equity method.
On
November 8, 2013, as a result of slower than anticipated progress in achieving sales objectives initially established for the Joint Venture, the Company and Pirelli agreed to
voluntarily dissolve the Joint Venture in accordance with the Joint Venture Agreement. The dissolution was finalized in April 2014, and the majority of the Company's investment balance of
$0.1 million was received at that time, with a small balance to be collected following the receipt of value added tax due from the Swedish and Italian governments.
F-39
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
16. Equity Investments (Continued)
In February 2008, the Company entered into an agreement with Tanaka Holdings Co., Ltd. (formerly Tanaka Holdings K.K.), a
Japanese company, which, together with its subsidiary Tanaka Kikinzoku Kogyo K.K., is referred to herein as TKK, to form a new joint venture company, TC Catalyst, Inc. ("TCC"), a
Japanese corporation. The joint venture is part of the Catalyst division. The Company entered the joint venture in order to improve its presence in Japan and Asia and strengthen its business flow into
the Asian market. Initially, the Company and TKK each owned 50% of TCC, and it ownership.
In
December 2008, the Company sold shares in TCC to TKK reducing its ownership to 30% and also sold to TKK certain intellectual property and associated rights in various countries in
Asia (the "Territory") related to heavy duty catalysts used in commercial vehicles and applications. In December 2009, the Company sold to TKK certain intellectual property and associated rights in
the Territory related to three-way catalysts, including low-platinum group metal ("PGM") catalysts, for non-commercial light vehicles and zero-PGM three-way catalysts for heavy duty commercial
vehicles and applications and non-commercial light vehicles. As part of the transaction, the Company also sold shares in TCC, which reduced its ownership in the joint venture to 5%. The Company
remains contractually obligated to fund its portion of the losses of the joint venture based on its ownership percentage, and it has also agreed not to compete in the Territory with TKK or TCC in
connection with heavy duty commercial vehicles and applications and light duty vehicles.
Subsequent
to these arrangements, the Company discovered that an exception allowing it to continue to supply catalysts in Japan to its largest customer had been omitted in an amendment
to the original transaction documents with TKK. The Company has shipped approximately $5.6 million of catalysts covered by the agreements since such amendment through December 31, 2014.
In this regard, the Company has made a good faith payment of $0.3 million to TKK with respect to such prior shipments.
The
Company's investment in TCC is accounted for using the equity method as the Company still has significant influence over TCC as a result of having a seat on TCC's board and due to
the technological interdependence between TCC and the Company. The Company's share of income and losses of TCC for the periods presented in this report are not significant.
17. Commitments and Contingencies
The Company leases certain equipment and facilities under operating leases that expire through 2020. The Company recognizes its minimum
lease payments, including escalation clauses, on a straight-line basis over the minimum lease term of the lease. Rent expense was $0.9 million and $1.0 million during the years ended
December 31, 2015 and 2014, respectively.
F-40
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
17. Commitments and Contingencies (Continued)
Future
minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2015 are (in thousands):
|
|
|
|
|
Years ending December 31:
|
|
|
|
|
2016
|
|
$
|
353
|
|
2017
|
|
|
349
|
|
2018
|
|
|
300
|
|
2019
|
|
|
2
|
|
2020 and thereafter
|
|
|
1
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
1,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By email dated June 26, 2015, CARB asserted the Company had deficiencies in compliance with the Verification Procedure,
Aftermarket Parts Regulations and the Vehicle Code. The initial penalty calculated by CARB for these alleged violations was $1.8 million, with the largest component relating to the use of empty
center bodies to allow trucks to be placed back in service while warranty claims are being evaluated. This process is now explicitly permitted by
regulation, but was not permitted at the time of the alleged violation. Although the Company disagreed, and continues to disagree, with CARB's findings, the Company has cooperated with CARB's
investigation and is discussing with CARB whether and to what extent the payment of monetary penalties would be appropriate. After review and evaluation of CARB's findings and publicly available CARB
settlements for similar matters, the Company has accrued an expense of less than $0.1 million as of December 31, 2015 for a proposed settlement provided to CARB to resolve this matter.
During 2016, CARB responded to the Company's proposed settlement with a counter-proposal of $0.8 million by cutting certain components of their initial penalty in half and reducing certain
penalties. The Company is currently evaluating CARB's recent counter-proposal and other relevant information, and an additional accrual may be recorded upon the completion of the Company's current
evaluation later in 2016. In the event that a mutually satisfactory agreement cannot be reached, the Company plans to defend any formal action taken by CARB.
For
information related to commitments and contingencies related to AUS, a former subsidiary of the Company that was sold in 2009, refer to Note 19, "Discontinued Operations".
In
addition to the foregoing, the Company is involved in legal proceedings from time to time in the ordinary course of its business. Management does not believe that any of these claims
and proceedings against it is likely to have, individually or in the aggregate, a material adverse effect on the Company's consolidated financial condition, results of operations or cash flows.
Accordingly, the Company cannot determine the final amount, if any, of its liability beyond the amount accrued in the consolidated financial statements as of December 31, 2015, nor is it
possible to estimate what litigation-related costs will be in the future.
18. Segment Reporting
Although the Company is transitioning its business from being a niche manufacturer of emissions control solutions for the automotive and heavy duty diesel markets to becoming an advanced
materials
F-41
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
18. Segment Reporting (Continued)
technology
provider for these markets, this transition has not yet affected the Company's current reportable segments. Currently, the Company has two business division segments based on the products
it delivers:
Catalyst division
The Catalyst division develops and produces catalysts to reduce emissions from gasoline, diesel and natural gas combustion
engines.
Most catalytic systems require significant amounts of costly PGMs to operate effectively. Using its proprietary mixed-phase catalyst, or MPC®, technology, the Catalyst division has
developed a family of unique high-performance catalysts, featuring inexpensive base-metals with low or even no PGM content. It has recently developed a new generation of catalyst technologies, which
the Company believes will enable further advances in catalyst performance and further reductions in PGM usage. Since 2001, the Catalyst division has supplied over twelve million catalyst parts to
light duty vehicle OEM customers. The Catalyst division is also a supplier of products for the Company's Heavy Duty Diesel Systems division. Intersegment revenues are based on market prices.
Heavy Duty Diesel Systems division
The Heavy Duty Diesel Systems division designs and manufactures exhaust emissions control solutions for a wide
range of heavy duty diesel applications. It offers a full range of DuraFit OEM replacement diesel particulate filters (DPFs) and diesel oxidation catalysts (DOCs), and products for the
verified retrofit and non-retrofit OEM markets through its distribution/dealer network and direct sales. The Company believes that its Heavy Duty Diesel Systems division offers one of the industry's
most comprehensive portfolios of emissions control systems for use in engine retrofit programs that have been evaluated and verified as compliant with applicable state and federal regulations, as well
as regulations imposed by several European countries. The Company has received certification from the Verification of Emission Reduction Technologies Association (VERT) for our Purifilter®
exhaust gas recirculation (EGR) diesel particulate filter system, which expands its retrofit market opportunities into South America and other international locations. Sales of emissions control
systems by the Heavy Duty Diesel Systems division are driven by the regulation of diesel emissions, particularly in the State of California.
Corporate
Corporate includes cost for personnel, insurance and public company expenses such as legal, audit and taxes that are not allocated down
to
the operating divisions.
F-42
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
18. Segment Reporting (Continued)
Summarized
financial information for the Company's reportable segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
2014
|
|
Net sales
|
|
|
|
|
|
|
|
Catalyst
|
|
$
|
26,224
|
|
$
|
23,772
|
|
Heavy Duty Diesel Systems
|
|
|
16,664
|
|
|
19,577
|
|
Eliminations(1)
|
|
|
(3,150
|
)
|
|
(2,118
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39,738
|
|
$
|
41,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
Catalyst
|
|
$
|
(1,612
|
)
|
$
|
(775
|
)
|
Heavy Duty Diesel Systems
|
|
|
(1,699
|
)
|
|
183
|
|
Corporate
|
|
|
(6,780
|
)
|
|
(6,894
|
)
|
Eliminations
|
|
|
(228
|
)
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(10,319
|
)
|
$
|
(7,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
Catalyst
|
|
$
|
170
|
|
$
|
135
|
|
Heavy Duty Diesel Systems
|
|
|
754
|
|
|
872
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
924
|
|
$
|
1,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
Catalyst
|
|
$
|
644
|
|
$
|
338
|
|
Heavy Duty Diesel Systems
|
|
|
17
|
|
|
116
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
661
|
|
$
|
454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Elimination
of Catalyst revenue related to sales to Heavy Duty Diesel Systems.
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
2014
|
|
Total assets
|
|
|
|
|
|
|
|
Catalyst
|
|
$
|
44,457
|
|
$
|
43,333
|
|
Heavy Duty Diesel Systems
|
|
|
43,580
|
|
|
40,552
|
|
Eliminations
|
|
|
(62,935
|
)
|
|
(56,228
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,102
|
|
$
|
27,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
18. Segment Reporting (Continued)
Net
sales by geographic region based on location of sales organization is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
2014
|
|
United States
|
|
$
|
24,323
|
|
$
|
22,678
|
|
Canada
|
|
|
12,143
|
|
|
14,300
|
|
Europe
|
|
|
3,272
|
|
|
4,253
|
|
|
|
|
|
|
|
|
|
Total international
|
|
|
15,415
|
|
|
18,553
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
39,738
|
|
$
|
41,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
fixed assets and total assets by geographic region as of December 31, 2015 and 2014 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets
|
|
Total Assets
|
|
|
|
2015
|
|
2014
|
|
2015
|
|
2014
|
|
United States
|
|
$
|
1,247
|
|
$
|
723
|
|
$
|
11,266
|
|
$
|
14,618
|
|
Canada
|
|
|
290
|
|
|
632
|
|
|
11,641
|
|
|
10,394
|
|
Europe
|
|
|
1
|
|
|
2
|
|
|
2,195
|
|
|
2,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
|
291
|
|
|
634
|
|
|
13,836
|
|
|
13,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,538
|
|
$
|
1,357
|
|
$
|
25,102
|
|
$
|
27,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19. Discontinued Operations
On October 20, 2014, the Company completed the sale of its Reno Business for $1.3 million in cash. The net assets held
for sale of the Reno Business were eliminated from the Company's balance sheet as of the sale date, and the Company recognized a gain of $0.2 million. Historically, the Reno Business was a
component of the Company's Heavy Duty Diesel Systems division. In presenting discontinued operations, general corporate overhead expenses that were historically allocated to the Reno Business for
segment presentation purposes were not included in discontinued operations.
Applied Utility Systems, Inc.
The Company is undergoing a sales and use tax audit by the State of California (the "State") on AUS for the period of 2007 through
2009. The audit has identified a project performed by the Company during that time period for which sales tax was not collected and remitted and for which the State asserts that proper documentation
of resale may not have been obtained and that the Company owes sales tax of $1.5 million, inclusive of interest. The Company contends and believes that it received sufficient and proper
documentation from its customer to support not collecting and remitting sales tax from that customer and is actively disputing the audit report with the State. On August 12, 2013, the Company
appeared at an appeals conference with the State Board of Equalization ("BOE"). On July 21, 2014, the Company received a Decision and Recommendation ("D&R") from the BOE. The
F-44
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
19. Discontinued Operations (Continued)
D&R's
conclusion was that the basis for the calculation of the aforementioned $1.5 million tax due should be reduced from $12.2 million to $9.0 million with a commensurate
reduction in the tax owed to the State. Regardless of this finding, the Company continues to believe that it will prevail in this matter, as it believes that the State did not adequately address the
legal arguments related to the Company's acceptance of the valid resale certificate from its customer. The Company has not agreed to these findings, and therefore, it will be appealing at a higher
level at the BOE. Based on a re-audit, the BOE lowered the tax due to $0.9 million, inclusive of interest. The Company continues to disagree with these findings based on the aforementioned
reasons. However, in October 2015, the Company offered to settle this case for $0.1 million, which is based on the expected cost of continuing to contest this audit. Accordingly, an accrual was
charged to discontinued operations during the year ended December 31, 2015 for the recent offer to settle this case. Should the Company not prevail with the recent offer to settle this case, it
plans to continue with the appeals process. Further, should the Company not prevail in this case, it will pursue reimbursement from the customer for all assessments from the State.
On
November 15, 2013, BP Products North America ("BP") instituted claims against Johnson Matthey ("JM") as the parent company of and purchaser of Applied Utility
Systems, Inc. ("AUS"), a former subsidiary of the Company. On May 12, 2010, JM tendered to the Company a claim for indemnification under the Asset Purchase Agreement dated
October 1, 2009 (the "Asset Purchase Agreement") among JM, the Company and AUS. On June 11, 2013, BP, JM and the Company entered into a settlement agreement and mutual release pursuant
to which they settled all claims. This settlement agreement had no material impact on the Company. Under the indemnification clauses of the Asset Purchase Agreement, the Company may be liable for
legal expenses incurred by JM. These legal costs may be offset against funds withheld by JM from the acquisition of AUS.
In
connection with the Asset Purchase Agreement, on October 1, 2009, JM presented the Company with an indemnification claim seeking recovery of the net amount of
$0.9 million after offsetting the funds withheld by JM from the acquisition of AUS. These claims were for matters relating to various customer contracts that JM purchased, including the BP
contract discussed above. The Company and JM entered into discussions relating to the application of offsets and the validity of the claims presented. On June 3, 2015, JM and the Company
entered into a settlement and release agreement pursuant to which they settled all claims for $0.7 million. This settlement was paid with an initial $0.1 million installment upon
execution of the settlement and release agreement, and the remaining balance was paid in July 2015.
F-45
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CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements (Continued)
19. Discontinued Operations (Continued)
The
following table presents revenue and expense information for discontinued operations (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
2014
|
|
Revenue
|
|
$
|
|
|
$
|
2,986
|
|
Expenses(1)
|
|
|
(112
|
)
|
|
(3,381
|
)
|
Gain on sale of the Reno Business
|
|
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
$
|
(112
|
)
|
$
|
(223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Includes
accruals and related costs of $0.5 million during the year ended December 31, 2014, to increase the Company's estimated liability to
settle its ongoing indemnification matters with JM associated with the sale of AUS in 2009.
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